Ch.03 Kinney 9e SM_Final

CHAPTER 3 PREDETERMINED OVERHEAD RATES, FLEXIBLE BUDGETS, AND ABSORPTION/VARIABLE COSTING QUESTIONS 1. Although   both   variable   and   mixed   costs   change   in   total   with   activity   measure changes, the difference is that variable costs change in direct proportion to such activity changes and mixed costs do not. Since a mixed cost has both a fixed and variable component, the cost per unit at different activity levels is not constant as it is with a variable cost. 2.

No, these are not always the best points of observation. First, the points must be within   the   relevant   range   of   activity.   Second,   to   be   useful,   the   points   must   be reflective of the entire data set of observation points. If the high and low points do not meet these two conditions, alternative points should be selected.

3.

There   are   several   reasons   for   using   predetermined   overhead   rates.   First,   the company does not need to wait to assign overhead costs to products or services until the end of the period when actual costs are known. Second, such rates  eliminate overhead   cost   fluctuations   that   have   nothing   to   do   with   volume   levels.   Third, predetermined overhead rates provide a means to control distortions in product costs caused   by   changes   in   volume   between   or   among   periods,   and   the   resulting product/service cost changes caused by differences in fixed cost per period.

4.

Departmental overhead rates  are superior to plantwide overhead rates  in that overhead application bases can be identified that more accurately reflect the causes of costs in each department. In effect, use of departmental rates permit more cost drivers to be identified and used as allocation bases. Separation of variable and fixed costs allows managers to make decisions that rely on knowledge of cost behavior. For example, some decisions require that a manager identify costs that will change if a particular decision alternative (such as whether to manufacture and sell additional units) is implemented. Total variable cost responds differently from total fixed cost to managerial actions. Use of a total overhead rate does not easily allow managers to determine the impact of such differences.

5.

The   two   differences   between   absorption   and   variable   costing   relate   to   the treatment of fixed factory overhead and the presentation of costs/expenses on the income statement. Absorption costing treats fixed factory overhead as a product cost and allocates it to the units produced during the period; variable costing treats fixed overhead as a period expense and charges the full amount incurred to the income of the period. Absorption costing presents costs on the income statement in functional categories without regard to cost behavior; variable costing presents costs on the 41 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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income statement first as product or period, secondly by cost behavior (variable or fixed), and possibly by functional categories. The underlying cause of the difference between absorption and variable costing is found in the definition of an asset. Asset cost should include all costs necessary to get an item into place and ready for sale or use. Absorption costing considers fixed overhead to be inventoriable (part of asset cost) because products could not be made without   the   basic   manufacturing   capacity   represented   by   fixed   overhead   cost. Variable   costing   proponents,   however,   believe   that   fixed   overhead   is   not inventoriable because it is incurred regardless of whether production occurs or not. The “correct” answer cannot be determined because both positions have logical and rational arguments to support them. 6.

Functionally classifying a cost refers to classification based on where the cost was incurred (production, selling, or administrative area) and for what purpose (wages, salaries, utilities, etc.). Behaviorally classifying a cost refers to classification based on the reaction that the cost has to a change in underlying activity (such as production or sales volume) and, thus, as variable or fixed. A company is concerned about behavioral classification because (as long as the company is operating in the relevant range of activity) variable costs will change in a direct relationship with changes in some underlying activity measure, but fixed costs will remain constant. If variable and fixed costs are combined and shown merely as functional categories, management will not be able to see how each functional category of cost will change with changes in activity.

7.

Absorption costing is required for external reporting. The rationale is that fixed manufacturing overhead is traditionally viewed as a product cost, and thus, it should be added to variable production cost and assigned to inventory. The total cost per unit will be shown as an expense only in the period in which the related products are sold.

8.

Use of monetary, quantitative information varies greatly between external and internal   users.   External   users   emphasize   profitability   potential;   internal   users emphasize information that helps make sales, production, and capital expenditure decisions. Both absorption and variable costing have a place in decision making. Accountants and decision makers need to understand the applications and limitations of the two techniques within the context of past, present, and future cost information needs. No matter which type of costing a firm uses, the firm’s total revenue must cover all costs—both variable and fixed—and also generate a satisfactory profit if a firm is to survive in the long run. The   methods   of   cost   accumulation   and   cost   presentation   used   for   reporting   are determined by what is acceptable to the parties for whom the reports are intended. External   reporting   is   guided   by   the   characteristics   of   reliability,   uniformity,   and consistency.   Internal   reporting   is   guided   by   flexibility   in   helping   managers   with planning, controlling, decision making, and performance evaluations. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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When production exceeds sales volume, absorption costing income will be higher than  variable costing  income because  some  of the  fixed factory  overhead  incurred during the period will be deferred into inventory rather than appearing on the income statement. Since no fixed overhead is inventoried under variable costing, there will be a larger expense on the income statement under variable costing than under absorption costing. When production is less than sales volume, some of the fixed overhead deferred in previous periods will be charged against income as part of cost of goods sold under absorption costing in addition to all of the current period fixed overhead. Thus, there will   be   a   higher   income   statement   charge   under   absorption   costing   than   under variable   costing   (which   will   only   expense   the   current   period   fixed   overhead). Therefore,   under   this   circumstance,   absorption   costing   income   will   be   less   than variable costing income.

10.

The regression method has the major advantage of using all points in the data set to determine the fixed and variable cost elements of the mixed costs. This  is in contrast to the high–low method, which uses only two points in the data set.  It is possible that the use of only two points could include outliers, if they are not recognized as such by the user.

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EXERCISES 11. a. (1) At any level, the variable cost is $2 per machine hour. Since four hours   are   needed   to   make   one   unit,   the   variable   rate   is   $8   per   unit.   At production of 10,000 units, the fixed rate is $325,000 ÷ 10,000 or $32.50 per unit. (2) At any level, the variable cost is $2 per machine hour. At production of 10,000 units, the fixed rate per machine hour = $32.50 ÷ 4 = $8.125 per machine hour. b.

(1) Combined rate = $8 + $32.50 = $40.50 per unit (2) Combined rate = $2 + $8.125 = $10.125 per unit c. At actual production of 11,000 units and applying OH on units of production:

Expected = Actual Applied VOH (11,000 × $8) $  88,000 (11,000  $8) = $ 88,000 FOH   325,000 (11,000  $32.50) =  357,500 12.

Under/Over  Applied $         0   32,500 overapp. a. Applied

VOH = 900  $8 = $7,200 Applied FOH = 900  $32.50 = $29,250 c. VOH: Actual VOH – Applied VOH = $7,500 – $7,200 = $300 underapplied  FOH: Actual FOH – Applied FOH = $26,500 – $29,250 = $2,750 overapplied 13.

a. Expected overhead = ($42,900  12) + ($6  78,000) = $514,800 + $468,000 = $982,800 Predetermined overhead rate = $982,800 ÷ 78,000 = $12.60 per DLH Overhead per unit = $12.60  1.5 hours per unit = $18.90

b. Manufacturing  Overhead                Various accounts     Work in Process Inventory (6,390  $12.60)          Manufacturing Overhead c.

128,550 128,550 80,514 80,514

6,390 DLHs ÷ 1.5 = 4,260 units should have been 

produced 14.

a. Jan. $180,000  2.50 = $450,000 Feb. $165,000  2.50 = $412,500 Mar. $170,000  2.50 = $425,000 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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b. Jan. Actual – Applied = $440,000 – $450,000 = Feb. Actual – Applied = $420,400 – $412,500 = Mar. Actual – Applied = $421,000 – $425,000 = Total for quarter

  $10,000 overapplied   $  7,900 underapplied   $  4,000 overapplied   $  6,100 overapplied

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15. a. ($600,400 + $199,600) ÷ (10,000 + 40,000) = $800,000 ÷ 50,000 = $16.00 per DLH b. ($600,400 + $199,600) ÷ (76,000 + 4,000) = $800,000 ÷ 80,000 = $10.00 per MH c. Assembly: $600,400 ÷ 76,000 = $7.90 per MH Finishing: $199,600 ÷ 40,000 = $4.99 per DLH d. Overhead assigned using answer from (a): 1  $16.00 = $16.00 Overhead assigned using answer from (b): 5  $10.00 = $50.00 Overhead assigned using answer from (c): (5  $7.90) + (1  $4.99) = $39.50 + $4.99 = $44.49 16. a. Manufacturing Overhead Cost of Goods Sold       b. Manufacturing Overhead Work in Process Inventory Finished Goods Inventory Cost of Goods Sold   WIP      FG     CGS     Total

66,000 66,000        66,000

$   384,000 384,000 ÷ 1,200,000 = 32% 96,000   96,000 ÷ 1,200,000 =   8%      720,000 720,000 ÷ 1,200,000 = 60% $1,200,000

21,120   5,280 39,600 0.32  $66,000 = $21,120 5,280 0.08  $66,000 = 0.60  $66,000 = 39,600

c. The method in (b) would be more appropriate in this instance because of the amount. Overapplied overhead is 5.5 percent of the total balances in all of the accounts containing overhead, so to close it directly to cost of goods sold would cause a distortion of the costs remaining in inventory and cost of goods sold. 17. a. Predetermined overhead rate = Applied overhead ÷ Actual DLHs    = $120,000 ÷ 5,000 = $24.00 per DLH b.

Overhead is underapplied by ($121,500 – $120,000) or $1,500

c. Because the amount of underapplied overhead is only about 0.5 percent of total production costs for the month, the underapplied balance could be closed only to Cost of Goods Sold without distorting product costs. The journal entry would be as follows: Cost of Goods Sold      Manufacturing Overhead

1,500 1,500

18. a. Using the information in the WIP Inventory account, the rate is $20,000 ÷ $10,000 or 200 percent of direct labor cost. b. The   amount   ($40,000)   should   be   prorated   because   it   is   large relative to the balances in Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold.

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c. ÷ $520,000) = $  3,846 Finished Goods Inventory: Cost of Goods Sold: Total 

Work in Process Inventory:    $40,000  ($  50,000 $40,000  ($200,000 ÷ $520,000) =   15,385 $40,000  ($270,000 ÷ $520,000) =   20,769 $40,000

d. A debit balance in the manufacturing overhead account can be the result of several causes including: (1) paying higher prices than budgeted for the resources comprising actual overhead, (2) using more overhead resources than attached to inventory for actual output, (3) producing at less capacity than the planned level of activity upon which the predetermined overhead rate was based, or (4) a combination of the prior three causes. 19. a. The   choice   of   capacity   measure   affects   the   amount   of   under­   or overapplied overhead only for fixed overhead costs. Because the total amount of overhead   that   is   expected   to   be   incurred   is   unaffected   by   the   volume   of production (as long as it is within the relevant range),  the per­unit cost of fixed overhead varies inversely with the level of actual production. If the actual capacity differs dramatically from the capacity chosen to allocate overhead, the result is likely to be large amounts of under­ or overapplied fixed overhead. If actual capacity is significantly below (above) the capacity used to develop the fixed overhead rate, the result   is   likely   to   be   a   significant   amount   of   underapplied   (overapplied)   fixed overhead. b. Expected   capacity   would   likely   result   in   the   least   amount   of under­ or overapplied overhead because expected capacity reflects the most likely level of capacity utilization for 2013. c. If   Milltown   is   in   a   cyclical   industry,   it   might   choose   normal capacity to allocate overhead costs. Normal capacity is based on a consideration of long­term activity that can accommodate an entire cycle in an industry. The annual capacity reflects the average of the long­term activity level. 20. a. VOH rate (can be calculated at either level): $1,250,000 ÷ 100,000 MHs = $12.50 per MH or $1,875,000 ÷ 150,000 MHs = $12.50 per MH b.

FOH rate: $1,440,000 ÷ 180,000 = $8.00 per MH

c. Expected capacity = 2/3  180,000 = 120,000 MHs FOH rate: $1,440,000 ÷ 120,000 = $12.00 per MH d. At 110,000 MHs: Total VOH applied = 110,000  $12.50 = $1,375,000 Total FOH applied (practical capacity rate): 110,000  $8.00 = $880,000 Total FOH applied (expected capacity rate): 110,000  $12.00 = $1,320,000 Total OH applied (practical) ($1,375,000 + $880,000) Actual OH Underapplied OH 

$  2,255,000    (2,710,000) $    (455,000)

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         Total OH applied (expected) ($1,375,000 + $1,320,000) $  2,695,000 Actual OH    (2,710,000) Underapplied OH $      (15,000)   MHs Total Cost = Variable Cost +  Fixed Cost 21. a.     High activity  34,000   $12,200 $5,440      $6,760 Low activity  31,000     11,720   4,960        6,760 Differences    3,000   $     480 Variable rate = $480 ÷ 3,000 MHs = $0.16 per MH High activity variable cost = 34,000  $0.16 = $5,440 Low activity variable cost = 31,000  $0.16 = $4,960 Fixed cost at high activity = $12,200  $5,440 = $6,760 Fixed cost at low activity = $11,720  $4,960 = $6,760 Budget formula: TC = FC + VC(X)   TC = $6,760 + $0.16 MH b.

$11,760

TC   =   $6,760   +   $0.16(31,250)   =   $6,760   +   $5,000   = Shipments Received          60          35          25

22. a. High activity Low activity Differences

Cost of Reports        $202          142        $  60

 Variable cost = $60 ÷ 25 = $2.40  Fixed cost (high point) = $202 – (60  $2.40) = $58  y = $58 + $2.40X b.

y = $58 + ($2.40  72)

y = $230.80 c. The most significant problem is that 72 shipments is far larger than the largest number of shipments in the data used to develop the equation. Thus, 72 may be outside of the relevant range for the equation. Other concerns are those associated with use of the high–low method including only two of the seven data points were used to develop the equation. 23. a. High activity Low activity Differences

   MHs Total Cost = Variable Cost + Fixed Cost 9,000   $   880     $(1,620)    $2,500 3,000     1,960          (540)      2,500 6,000  $(1,080)

Variable rate = $(1,080) ÷ 6,000 MHs = $(0.18) per MH High activity variable cost = 9,000  $(0.18) = $(1,620) Low activity variable cost = 3,000  $(0.18) = $(540) Fixed cost at low activity = $1,960 – $(540) = $2,500 Total maintenance cost = $2,500 – $0.18 MH © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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b. The variable cost component is negative, which implies that, as the   number   of   machine   hours   increases,   the   amount   of   maintenance   costs declines. Such a relationship is implausible. One explanation that would account for the perceived inverse relationship would be that the company performs the maintenance   chores   when   there   is   idle   time   available.   As   business   activity increases, less and less time is available to perform maintenance activities. c. For   a   cost   prediction   formula   to   work   effectively,   a   positive relationship between the activity measure and the cost pool is not required. Thus, the formula developed in (a) might function effectively. However, one cannot interpret the parameters of the model (–$0.18, $2,500) as variable and fixed costs, respectively. 24. a.

      High activity Low activity Differences

     MHs     1,900     1,250        650

Total   Cost = $1,160      900 $   260

Variable    Cost     $760      500

  Fixed +    Cost $400 400

Variable rate = $260 ÷ 650 MHs = $0.40 per MH Cost formula: y = $400 + $0.40 MH         b. Variable utility cost @ $0.40 per MH Fixed utility cost Expected total utility cost

      1,325   1,500   1,675      $  530 $   600 $   670          400      400      400      $  930 $1,000 $1,070

25. a. If the purpose is to control costs, the comparison is inappropriate. Actual cost should be compared with flexible budget cost at the same level of output as that of the actual cost—in this case 17,600 units (not 16,000 units). A flexible budget formula allows the determination of costs at any level of activity. b. Variable rate (b) (at any point) = $4 (for example, $80,000 ÷ 20,000 units) Fixed amount (a) (given) = $32,000 The flexible budget for 17,600 units is: $  70,400 Variable (17,600  $4) Fixed     32,000 Total $102,400 A comparison with the budget follows: Variable Fixed Total

Budget $  70,400     32,000 $102,400

Actual $  69,000     32,800 $101,800

Variances $1,400 F     800 U   $  600 F

The company did well controlling variable costs, but fixed costs were $800 over the budgeted amount.

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26. a.  Variable costs: Supplies @ $4.00 per DLH Direct labor @ $7.00 per DLH Utilities @ $5.40 per DLH Fixed costs: Direct labor Utilities Rent Advertising   Total cost b. Cost per DLH

250

300

350

400

$1,000 1,750  1,350 

$1,200 2,100 1,620

$1,400   $1,600 2,450     2,800 1,890    2,160

500  350 450        75 $5,475

500 350 450        75 $6,295

500 350 450        75 $7,115

$21.90 

$20.98

$20.33 

      500       350       450         75  $7,935 $19.84

c. $20.33  1.4 = $28.46 hourly charge $28.46  1.25 hours per repair = $35.58 or $36 per customer repair 27. a. (18,000 – 16,560)  $22.00 = 1,440  $22.00 = $31,680 b. $18.00 = $25,920

(18,000 – 16,560)    ($22.00 – $4.00) = 1,440  

c. Absorption   costing   would   have   produced   the higher net income because it would have required $5,760 (1,440  $4.00) of fixed manufacturing   overhead   to   be   inventoried   rather   than   to   be   charged   against income. 28. The variance between variable and absorption net income is caused by the difference in treatment of fixed manufacturing overhead. Fixed overhead expensed:    Variable costing    Absorption costing [$500,000  (21,000 ÷ 25,000)] Net income difference

$ 500,000   (420,000) $   80,000

The company’s net income would have been $80,000 higher under absorption costing. 29. a. Ingredients Labor Variable overhead Total variable cost Divided by units  Variable cost per unit Total variable cost Fixed overhead Total cost Divided by units

           $ 228,800      104,000      197,600   $ 530,400   ÷ 104,000   $       5.10   $ 530,400        98,800   $ 629,200   ÷ 104,000

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Absorption cost per unit b. $5.10 = $510,000 c.  $6.05 = $605,000

  $       6.05 Variable cost of goods sold = 100,000  Absorption cost of goods sold = 100,000

d. Ending   inventory   (variable   costing)   = 4,000  $5.10 = $20,400 Ending inventory (absorption costing) = 4,000  $6.05 = $24,200 e. Fixed   overhead   charged   to   expense (variable costing) = $98,800 Fixed overhead charged to expense (absorption costing) = $95,000 30. a.

  b. 

Income – Variable costing Deduct increase in CGS [FOH out of inventory ($8  9,600)] Income – Absorption costing Income – Variable costing Add decrease in CGS [FOH inventoried ($8 × 3,000)] Income – Absorption costing

   $188,000      (76,800)    $111,200    $188,000        24,000    $212,000

31. a. (1)                                          Fabio’s Fashions Income Statement (Absorption Costing Basis) For the Month Ended April 30, 2013 Sales ($14,400,000 ÷ $144 = 100,000 units sold)  $ 14,400,000 (10,200,000) Cost of goods sold ($102  100,000) *     (1,275,000) Production volume variance ($30  42,500) Gross margin   $   2,925,000 Fixed selling & administrative expenses      (2,400,000)  Income before taxes   $      525,000 Total production (100,000 units sold + 7,500  units inventoried)  Expected production Units creating volume variance *

       107,500        (150,000)                     42,500

(2) Differences in incomes = $300,000 – $525,000 = $(225,000) This amount is equal to the increase in inventory of 7,500 units  $30 per unit fixed overhead deferred in ending inventory under absorption costing. b. Caffrey   should   find   the   variable   costing   approach   to   income determination desirable for many reasons, including the following:   Variable costing income varies with units sold, not units produced.

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 

Fixed manufacturing overhead costs are charged against revenue in the period in which they are incurred; consequently, manufacturing cost per unit does not change with a change in production level. The   contribution   margin   offers   a   useful   tool   for   marketing   decisions   that consider   changes   in   relationships   among   costs,   volume   levels,   and   profit figures. (CMA adapted)

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32. a. Budgeted fixed overhead = $0.40  100,000 =    $40,000  b. Actual (and budgeted) fixed overhead Applied fixed overhead (45,000  $0.40) Underapplied fixed overhead (absorption)

$40,000   18,000 $22,000

There is no underapplied or overapplied fixed overhead under variable costing because fixed overhead is not applied to units of product. Direct material Direct labor Variable overhead Cost per unit (variable) Fixed overhead Cost per unit (absorption)       d. Absorption cost of goods sold (48,750  $5.60)       Plus underapplied overhead (55,000  $0.40)     Adjusted cost of goods sold     Selling and administrative costs:         Variable (48,750  $0.40)         Fixed      Total expense (absorption)     Variable cost of goods sold (48,750  $5.20)     Variable selling expenses (48,750  $0.40)     Fixed overhead     Fixed selling and administrative expenses     Total expense (variable)

$3.60 1.00   0.60 $5.20   0.40 $5.60 $273,000     22,000 $295,000 $  19,500   150,000

  169,500 $464,500 $253,500 19,500 40,000   150,000 $463,000

e. Income is higher under variable costing because the sales level is greater than the production level. Income will be higher by the fixed overhead per unit ($0.40) times the change in inventory (3,750 unit decline) or $1,500. 33. Each student will have a different answer, but the following points should be addressed. The debate surrounding the use of variable costing versus  absorption costing for valuing inventory hinges on whether the incurrence of fixed overhead creates an asset. A cost incurred to create an asset, as opposed to a cost that is an expense   of   the   period,   must   be   capitalized   and   should   not   be   charged   against revenues   (expensed)   until   its   related   benefit   is   recognized   in   income.   Since inventory is an asset, any costs that are incurred to create that asset, including fixed overhead, should be considered for capitalization. This is the argument for use of absorption costing. However, proponents of variable costing argue that the incurrence of fixed overhead relates   more   to   the   capacity   to   produce   than   to   production.   Accordingly,   these people argue that fixed overhead is not directly related to production sufficiently to be considered an inventoriable cost.

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34. a.

x 50 44 40 35 53 58   60 340

y     $   175 162 154 142 185 200          202     $1,220

xy $  8,750 7,128 6,160 4,970 9,805 11,600   12,120 $60,533

 x 2 2,500 1,936 1,600 1,225 2,809 3,364   3,600 17,034

x=340 ÷7=48.57 y=$ 1,220 ÷7=$ 174.29 ∑ xy −n( x )( y) = $ 60,533−7 (48.57)($ 174.29)= $ 1,276.14 =$ 2.45 b= 17,034−7(48.57)(48.57) 520.69 ∑ x 2−n(x)2 a= y−b x=$ 174.29−2.45(48.57)=$ 55.29 y   ¿  $55.29 + $2.45 (# of shipments)

b. y = $55.29 + $2.45(165) = $459.54 Note   that   one   would   be   cautious   to   use   this   prediction   because   165   may   be substantially greater than the relevant range of activity. 35.                x 200 325 400 410 525 680 820    900 4,260

y $   300 440 480 490 620 790 840      900 $4,860

  xy $     60,000 143,000 192,000 200,900 325,500 537,200 688,800      810,000 $2,957,400

 

  x  2 40,000 105,625 160,000 168,100 275,625 462,400 672,400    810,000 2,694,150

x=4,260 ÷ 8=532.60 y=$ 4,860 ÷ 8=$ 607.50 ∑ xy −n( x )( y) = $ 2,957,400−8 (532.50)( $ 607.50) = $ 369,450 =$ 0.87 b= 2,694,150−8 (532.50)(532.50) 425,700 ∑ x 2−n(x)2 a= y−b x=$ 607.50−$ 0.87(532.50)=$ 144.23 y   ¿ $144.23 + $0.87 MH

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PROBLEMS 36. a. OH rate = Allocated overhead ÷ Actual hours   = ($80,000 + $16,000 + $4,000) ÷ (8,000 + 1,600 + 400)   = $10.00 per DLH MH

b.

OH rate = $100,000 ÷ (800 + 2,400 + 12,800) = $6.25 per

c. GW1: 800  $6.25 = $5,000 GW4: 2,400  $6.25 = $15,000 GW7: 12,800  $6.25 = $80,000 d. The overhead allocations differ dramatically because most of the direct   labor   hours   are   expended   on   the   production   of   GW1   and   most   of   the machine   hours   are   expended   on   GW7.   GW4   is   allocated   similar   amounts   of overhead under the two schemes only because its production requires a balance of machine and labor time. The better allocation cannot be determined based on the available information. However,   identifying   the   better   allocation   requires   that   the   costs   comprising overhead be examined to determine whether they are more closely associated with labor time or machine time. Alternatively, an overhead allocation scheme could be devised that would use two overhead rates: one using direct labor to allocate   the   labor­driven   overhead   costs   and   the   other   uses   machine   hours   to allocate the machine­driven portion of overhead. 37. a. Indirect material Indirect labor Utilities Repairs & maintenance Material handling Depreciation Rent on plant building Insurance on plant building    Totals

     Fixed Costs $144,000       6,000     20,000     16,000   210,000     50,000     12,000 $458,000

  Variable Costs    $2.00      2.50      0.04      0.34      0.12

   $5.00

y = $458,000 + $5X b. Capacities computed: Theoretical = 50,000 units Practical = 50,000  0.80 = 40,000 units Normal = 50,000  0.80  0.80 = 32,000 units Expected capacity = 30,000 units Overhead application rates (per unit): Theoretical: ($458,000 ÷ 50,000) + $5 = $14.16 Practical: ($458,000 ÷ 40,000) + $5 = $16.45 Normal: ($458,000 ÷ 32,000) + $5 = $19.31 (rounded) © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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Expected: ($458,000 ÷ 30,000) + $5 = $20.27 (rounded)

c.

Actual cost = $458,000 + ($5  35,000) = $633,000

Applied overhead: Theoretical rate: $14.16  35,000 = $495,600 Practical rate: $16.45  35,000 = $575,750 Normal rate: $19.31  35,000 = $675,850 Expected rate: $20.27  35,000 = $709,450 Under/Overapplied amounts:  Theoretical:  Practical:  Normal:  Expected:

  Applied $495,600   575,750   675,850   709,450

38. a. Variable costs: Indirect material Indirect labor Factory utilities Machine maintenance Material handling Machine depreciation Total variable costs Fixed costs: Factory utilities Machine maintenance Material handling Building rent  Supervisors’ salaries Factory insurance Total fixed costs

   Actual $633,000   633,000   633,000   633,000

(Under­) Overapplied Amount           $(137,400)               (57,250)               42,850                76,450

Expected 72,000

     Normal 76,000

  Practical Theoretical 80,000 100,000

$180,000 216,000 1,440 36,000 8,640 2,160 $444,240

$190,000 228,000 1,520 38,000 9,120        2,280     $468,920

$200,000 240,000 1,600 40,000 9,600        2,400 $493,600

$250,000    300,000        2,000      50,000    12,000        3,000 $617,000

$    3,000 10,000 8,000 12,000 72,000       6,000 $111,000

$    3,000 10,000 8,000 12,000 72,000       6,000 $111,000

$    3,000 10,000 8,000 12,000 72,000       6,000 $111,000

$6.17

$6.17

$6.17

$1.46

$1.39

$1.11

$

3,000 10,000 8,000 12,000 72,000 6,000 $111,000

Variable OH rate per unit  Fixed OH rate per unit

$6.17 $1.54

Variable Manufacturing Overhead

    175,000

1 )        Raw Material (Supplies) Inventory To record indirect material at $2.50 per unit  produced  © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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Variable Manufacturing Overhead       Wages Payable (or Cash) To record indirect labor at $3.00 per unit produced

210,000 210,000

Variable Manufacturing Overhead Fixed Manufacturing Overhead Utilities Payable (or Cash) To record factory utilities

1,400  3,000

Variable Manufacturing Overhead  Fixed Manufacturing Overhead Cash (or Supplies) To record factory maintenance

35,000  10,000 45,000

Variable Manufacturing Overhead  Fixed Manufacturing Overhead Cash To record material handling charges

8,400  8,000

Variable Manufacturing Overhead  Accumulated Depreciation To record depreciation at $0.03 per unit produced

2,100

Fixed Manufacturing Overhead  Cash To record building rent

12,000

Fixed Manufacturing Overhead Salaries Payable (or Cash) To record supervisors’ salaries

72,000

Fixed Manufacturing Overhead Cash (or Prepaid Ins. or Ins. Payable)  To record factory insurance Work in Process Inventory Variable Manufacturing Overhead Fixed Manufacturing Overhead To apply variable and fixed manufacturing  overhead to WIP

4,400

6,000

539,700

Actual fixed overhead

$111,000

Applied fixed overhead (70,000  $1.54) Underapplied fixed overhead

  107,800 $    3,200

16,400

2,100 

12,000

72,000

6,000

431,900 107,800

d. Use   of   expected   capacity   would   create   costs   that   would   more closely match actual production costs. However, use of practical capacity would help indicate to management the costs of unused capacity.

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39. a. Total overhead = $635,340 + $324,000 = $959,340 Total MHs = 72,000 + 9,300 = 81,300 OH rate per MH = $959,340 ÷ 81,300 MH = $11.80 per MH Applied overhead = $11.80  10.30 = $121.54 b. Fabrication: $635,340 ÷ 72,000  $  88.20 MHs = $8.82 per MH  10     13.50 Finishing: $324,000 ÷ 48,000 DLHs = $6.75 per DLH  2 Total OH applied per unit using departmental rates $101.70 c. Because each department is so different in the type of work being performed (machine intensive vs. labor intensive), plantwide rates will not accurately attach overhead costs. 40. a.

(1) Total DLHs = 27,000 + 3,000 = 30,000  OH rate per DLH = $993,000 ÷ 30,000 DLHs = $33.10 per DLH Total MHs = 2,100 + 65,800 = 67,900  OH rate per MH = $993,000 ÷ 67,900 MHs = $14.62 per MH b. Cutting: $385,500 ÷ 27,000 DLHs = $14.28 per DLH Assembly: $607,500 ÷ 65,800 MHs = $9.23 per MH c.

     RW22SKI Direct material $  34.85   120.00 Direct labor—Cutting (6  $20.00; 4.8  $20.00)       0.24 Direct labor—Assembly (0.03  $8.00; 0.05  $8.00) Total cost other than overhead $155.09 (1) Overhead (plantwide  rate using DLHs)   199.59      (6.03  $33.10; 4.85  $33.10)  Total cost $354.68 (2)

Total cost other than 

overhead Overhead (plantwide rate using MHs)      (5.96  $14.62; 9.45  $14.62) Total cost (3)

Total cost other than  overhead Cutting Department overhead      (6  $14.28; 4.8  $14.28)  Assembly Department overhead      (5.9  $9.23; 9.3  $9.23)  Total cost

 SD45ROW $  19.57     96.00       0.40 $115.97   160.54  $276.51

$155.09

$115.97

    87.14 $242.23

  138.16 $254.13

$155.09

$115.97

  85.68

    68.54

    54.46  $295.23

          85.84       $270.35

c. Given   that   a   competitor   sells   the   similar   product   for   $310, management   would   probably   conclude   that   production   of   RW22SKI   was   not

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feasible if the cost determined from a plantwide overhead rate based on DLHs was   used;   competing   on   price   would  create   a   “loss”   per  unit.   Using   the   cost determined from a plantwide rate based on MHs  might cause management to undercut the competitor’s price substantially, believing that a significant profit margin could be made. Using the cost determined from departmental rates (which is the most accurate of the three costs) would allow management to meet the competition’s price but would provide a small 5 percent profit margin ($310 – $295.23   =   $14.77;   $14.77   ÷   $310   =   0.05).   Possibly   management   needs   to determine if the product could be produced more efficiently. $100,000 20,000 80,000   120,000 $320,000

41. a. Variable indirect labor     Variable indirect material     Variable utilities     Variable portion of other mixed costs     Total variable OH costs

Total variable OH costs ÷ Number of MHs = Variable OH rate per MH   $320,000 ÷ 50,000 MHs = $6.40 per MH Fixed machinery depreciation Fixed machinery lease payments Fixed machinery insurance Fixed salaries Fixed utilities Total fixed overhead OH costs

$  62,000 13,000 16,000 75,000     12,000 $178,000

Total fixed OH costs ÷ Number of MHs = Fixed OH rate per MH  $178,000 ÷ 50,000 MHs = $3.56 per MH Variable Manufacturing Overhead 

273,600

Various accounts To record actual VOH costs

 273,600

Fixed Manufacturing Overhead Various accounts To record actual FOH costs

185,680

Work in Process Inventory (53,000 MHs × $6.40)  Variable Manufacturing Overhead To apply VOH to production

339,200

Work in Process Inventory (53,000 MHs  $3.56)  Fixed Manufacturing Overhead To apply FOH to production

188,680

 185,680

 339,200

 188,680

Actual VOH

$273,600

Actual FOH

$185,680

Applied VOH

  339,200

Applied FOH

  188,680

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Overapplied VOH

$  65,600

Overapplied FOH

Fixed Manufacturing Overhead

$    3,000

3,000

Cost of Goods Sold To close FOH at year­end

WIP  FG  CGS  Total 

3,000

   Balance

          Proportion 

  % 

$   234,000      390,000      936,000 $1,560,000

$234,000 ÷ $1,560,000   390,000 ÷ $1,560,000   936,000 ÷ $1,560,000

15       $65,600 25       $65,600   60       $65,600 100

Variable Manufacturing Overhead        Work in Process Inventory       Finished Goods Inventory       Cost of Goods Sold

Overapp. OH     Adj. $  9,840   16,400   39,360 $65,600

65,600 16,400 39,360

9,840

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42. a. Indirect material: variable; at either level, $6.40 per animal day         Indirect labor: mixed; $8,000 + $12.00 per animal day a   6,000  days  $ 80,000  t  a  (4,000) days       (56,000) t    2,000 $ 24,000     $24,000 ÷ 2,000 = $12 per animal day   Total cost   Variable ($12  6,000 animal days)   Fixed

      $80,000   72,000 $  8,000

          Maintenance: mixed; $4,000 + $1.60 per animal day at  6,000  days  $ 13,600 at (4,000) days    (10,400)   2,000  $   3,200   $3,200 ÷ 2,000 = $1.60 per animal day   Total cost   Variable ($1.60  6,000 animal days)   Fixed

    $13,600        (9,600)     $  4,000

Utilities: variable; at either level, $2.00 per animal day All other: mixed; $2,400 + $3.20 per animal day at   6,000  days  $ 21,600 at  (4,000) days    (15,200)   2,000   $   6,400    $6,400 ÷ 2,000 = $3.20 per animal day    Total cost    Variable ($3.20  6,000 animal days)    Fixed

      $ 21,600         (19,200)       $   2,400

Total fixed cost = $8,000 + $4,000 + $2,400 = $14,400 Total variable cost = $6.40 + $12.00 + $1.60 + $2.00 + $3.20 = $25.20 Total OH cost formula: $14,400 + $25.20 per animal day b.

$14,400 ÷ ($26.80  $25.20) = 9,000 animal days

c.

$26.80  9,000 = $241,200

       d. VOH rate remains constant at FOH rate ($14,400 ÷ 12,000) Total OH rate at 12,000 animal days

  $25.20       1.20 $26.40*

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This rate assumes that 12,000 days is still within the relevant range of activity and,  therefore,  no variable  costs  will  change  per  unit  and  no fixed  costs   will change in total. *

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65

43. a. High activity  Low activity      Differences 

      MHs    Total Cost 2,700         $13,160      (1,400)         (9,000)       1,300       $  4,160

=

Variable Cost     $8,640       4,480

+

Fixed Cost $4,520  4,520

Variable rate = $4,160 ÷ 1,300 MHs = $3.20 per MH High activity variable cost = 2,700  $3.20 = $8,640 Low activity variable cost = 1,400  $3.20 = $4,480 Fixed cost at low activity = $9,000 – $4,480 = $4,520 Total R&M cost = $4,520 + $3.20 MH              x

   y

xy

 x  2

1,400 1,900 2,000 2,500 2,200 2,700 1,700   2,300 

$  9,000 10,719 10,900 13,000 11,578 13,160 9,525   11,670

1,960,000 3,610,000 4,000,000 6,250,000 4,840,000 7,290,000 2,890,000   5,290,000

16,700

$89,552

$ 12,600,000 20,366,100 21,800,000 32,500,000 25,471,600 35,532,000 16,192,500     26,841,00 0  $191,303,20 0

36,130,000

x=16,700 ÷ 8=2,087.50 y=$ 89,552 ÷ 8=$ 11,194 ∑ xy −n( x )( y) = $ 191,303,200−8(2,087.50)( $ 11,194 )= $ 4,363,400 =$ 3.44 b= 36,130,000−8(2,087.50)(2,087.50) 1,268,750 ∑ x 2−n(x)2 a= y−b x=$ 11,193.25−$ 3.44(2,087.50)=$ 4,012.25 y ¿ $4,012.25 + $3.44 MH c. Part (b) computations provide the better answer. The least squares regression approach takes into consideration all of the available data and employs a mathematical algorithm to minimize the variance around the fitted regression line. 44. a.  Variable costs: Supplies

Direct labor Overhead

550 $ 2 , 2 0 0 6,600        55 0

DIRECT LABOR HOURS 600 650 $ 2 , 4 0 0 7,200        60 0

$ 2 , 6 0 0 7,800        65 0

700 $  2,800

8,400        700

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Total variable costs

Variable cost per DLH 

Fixed costs: Overhead

Fixed costs per DLH

Total cost                   b. Total cost per DLH

$ 9 , 3 5 0 $ 1 7 . 0 0

$10,20 0

$11,05 0

$11,900

$ 1 7 . 0 0

$ 1 7 . 0 0

$  17.00

$       $   8 8,000 , 0 0 0 $ $ 1 1 4 3 . . 5 3 5 3 $17,35 $18,20 0 0 $ 3 1 . 5 5

$ 3 0 . 3 3

$

8 , 0 0 0 $ 1 2 . 3 1 $19,05 0 $ 2 9 . 3 1

$  8,000

$  11.43

$19,900 $  28.43

c. Price = (1.45 × $29.31) + [0.4 ×  (1.45 × $29.31)] = $59.50 (rounded)

     45. a.       Low   2,500 Production overhead costs:    Variable    Fixed    Total

$  10,125     95,400 $105,525

ACTIVITY IN MHs    High         3,000     3,500 $  12,150     95,400 $107,550 

$  14,175     95,400 $109,575

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Chapter 3

Installation overhead costs:    Variable    Fixed    Total

67

6,000

ACTIVITY IN DLHs   7,000    8,000

$  85,500      $  99,750     73,800         73,800 $159,300     $173,550

$114,000     73,800 $187,800

Number of pools: 8    Production (25 MHs per pool):     Variable (8  25  $4.05)     Fixed (monthly amount)    Total production overhead    Installation (60 DLHs per pool):     Variable (8  60  $14.25)     Fixed (monthly amount)    Total installation Total

$   810   7,950 $6,840   6,150

$  8,760

  12,990 $21,750

Number of pools: 120     Production (25 MHs per pool):      Variable (120  25  $4.05)      Fixed     Installation (60 DLHs per pool):    Variable (120  60  $14.25)    Fixed Total overhead Budgeted capacity Overhead cost per pool

$  12,150     95,400 $102,600     73,800

   $ 107,550

        176,400            $ 283,950        ÷ 120 $2,366.25

46. You would likely tell Snider that he should provide to his superior the equation for each   cost   that   provides   the   most   accurate   prediction   of   the   cost.   To   make   this determination, you could advise Snider to use each of the two equations to predict costs in past periods. The equation that produces the least error in the prediction would be the best equation to use in the budgeting process. Since Snider used the high­low method to develop his equations, he used only two months of data in the estimation process. Other monthly data could be used to assess the accuracy of each equation. Your initial bias would favor the model based on machine hours because that model produces a much lower fixed cost (cost unexplained by the x variable in the model).

47. a.                                                       Georgia Shacks Income Statement (Absorption) © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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For the Year Ended December 31, 2013    Sales    Cost of goods sold—variable Fixed overhead [($1,500,000 ÷ 2,000)  1,500]    Gross profit Variable selling & administrative Fixed selling & administrative    Net income

$1,950,000   1,125,000 $   270,000      190,000

$ 3,750,000   (3,075,000)  $    675,000      (460,000)   $    215,000

b. The difference in the amounts is equal to the fixed overhead of ($1,500,000 ÷ 2,000 units) or $750 per unit times the 500 units produced   but  not  sold  during   the  year.   This  $375,000  is  contained   in  ending inventory   under   absorption   costing,   whereas   it   appears   as   part   of   total   fixed overhead expense on the variable costing income statement. c. It is not only ethical, but it is also required for the statements to be in conformity with generally accepted accounting principles. d.

(1)                  Georgia Shacks  Income Statement (Variable) For the Year Ended December 31, 2014  $ 5,500,000 Sales (2,200  $2,500)   (2,860,000) Variable cost of goods sold (2,200  $1,300) Product contribution margin  $ 2,640,000       (396,000) Variable selling & administrative ($180  2,200) Contribution margin  $ 2,244,000      Fixed overhead   $1,500,000      Fixed selling & administrative       190,000    (1,690,000) Net income   $    554,000 (2)

        Georgia Shacks      Income Statement (Absorption) For the Year Ended December 31, 2014 Sales Cost of goods sold—variable Fixed overhead [($1,500,000 ÷ 2,000)   2,200] Gross profit Variable selling & administrative Fixed selling & administrative Net income

$2,860,000   1,650,000

$   396,000      190,000

    $ 5,500,000   (4,510,000)      $    990,000      (586,000)      $    404,000

(3) Net income under variable    $ 554,000 costing  Net income under absorption costing   (404,000) Difference in net incomes   $ 150,000 The difference in the net incomes is equal to the incremental decrease in the ending balances of the inventory accounts when compared to the beginning © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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69

balances. Another way to look at this more easily is to multiply the 200 units sold in excess of the 2,200 units produced by the fixed overhead application rate of $750 per unit (200  $750 = $150,000). The   decrease   in   income   in   absorption   costing   is   due   to   previously inventoried costs now hitting the income statement. This happens because the number of units sold exceeds the number of units produced. 48.

Bird’s Eye View Income Statements (Absorption) For the Years Ended December 31, 2013 and 2014 2013 (10,000 units) 2014 (12,000 units) Sales (units × $500) $ 5,000,000 $ 6,000,000 CGS (units × $270) $2,700,000 $3,240,000 Underapplied FOH                 0  (2,700,000)        90,000     (3,330,000) Gross profit $ 2,300,000 $ 2,670,000 S&A:    Variable (units × $50) $   500,000 $   600,000    Fixed      180,000     (680,000)      180,000        (780,000) Income before taxes $ 1,620,000  $ 1,890,000

Bird’s Eye View  Income Statements (Variable) For the Years Ended December 31, 2013 and 2014 2013 (10,000 units) 2014 (12,000 units)   $  5,000,000   $ 6,000,000 Sales (units  $500)      (2,100,000)     (2,520,000) CGS (units  $210) Product CM   $  2,900,000 $ 3,480,000         (500,000)        (600,000) Variable S&A (units  $50) Total CM   $  2,400,000 $ 2,880,000 Fixed costs:     Factory $750,000 $750,000     S&A   180,000          (930,000)     180,000        (930,000) Income before taxes    $  1,470,000  $ 1,950,000 Net income (absorption) Net income (variable) Difference in income

2013 $1,620,000   1,470,000 $   150,000

       2014    $1,890,000      1,950,000     $    (60,000)

Difference equals inventory change  Times FOH application rate Difference in income

      + 2,500               $60  $   150,000

    1,000                     $60    $    (60,000)

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49. a.

                                          Akron Aviation    Income Statement (Variable)       For the Year Ended December 31, 2014

Sales Variable cost of goods sold: Work in process 1/1/14 Finished goods 1/1/14 Manufacturing costs incurred Total costs available Work in process 12/31/14 Finished goods 12/31/14 Product contribution margin Variable selling expenses Contribution margin Fixed expenses: Factory overhead Selling Administrative Operating Income

$1,015,000    $  46,400  16,950      650,600    $713,950           (61,900)           (13,180)

     $  42,300         44,250          75,000

    (638,870) $   376,130       (50,750) $   325,380

       (161,550)       $   163,830

                                            Supporting calculations     Variable finished goods inventory at 1/1/14: Absorption finished goods inventory Less fixed overhead (1,050 hours  $1 per hour) Variable finished goods inventory

    $18,000    (1,050)     $16,950

    Variable work in process inventory at 1/1/14: Absorption work in process inventory Less fixed overhead (1,600 hours  $1 per hour) Variable work in process

    $48,000    (1,600)     $46,400

    Variable manufacturing costs incurred during 2014: Direct material Direct labor (23,000 hours  $6 per hour)  Variable overhead (23,000 hours  $6.20 per hour) Variable manufacturing costs

 $370,000    138,000    142,600 $650,600

The direct labor rate is ($150,000 ÷ 25,000 hours) or $6.00 per hour. The variable overhead rate is ($155,000 ÷ 25,000 hours) or $6.20 per hour.     Variable work in process inventory at 12/31/14: Absorption work in process inventory Less fixed overhead (2,100 hours  $1) Variable work in process inventory

    $64,000                      (2,100) $61,900

    Variable finished goods inventory at 12/31/14: Absorption finished goods inventory Less fixed overhead (820 hours  $1) Variable finished goods inventory

  $14,000                        (820)    $13,180

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71

Variable selling expenses = Sales × 5% = $1,015,000 × 5% = $50,750 Fixed selling expenses:     Total selling expenses     Less variable selling expenses     Fixed selling expenses

$ 95,000   (50,750) $ 44,250

b. The main advantage of variable costing is that it reveals the marginal cost of production. That is, variable costing facilitates making decisions about pricing, changes in volume, and changes in cost structure. Variable costing also facilitates identification of the break­even point. Further, variable costing does not lend itself to managerial manipulation of income. The major disadvantage is that variable costing treats fixed overhead as a period cost and,   therefore,   may   violate   the   matching   principle   if   one   believes   fixed manufacturing overhead is a product cost. 50. a. Increasing production, relative to sales or relative to prior plans, has the effect of moving fixed manufacturing overhead from the income statement to the balance sheet.   By   producing   substantially   more   units   than   are   required   to   meet   sales demand, a significant portion of the fixed manufacturing overhead cost incurred can be put into inventory and the result is a lower Cost of Goods Sold than would otherwise be reported. b. Because   the   increase   in   production   is   not matched   by   an   increase   in   sales,   finished   goods,   and   perhaps   in   process, inventories   would   increase.   Also,   the   costs   of   manufacturing   would   rise   as production increases. The rising costs could be realized in the form of higher accounts   payable   balances,   lower   cash   balances,   or   higher   loan   balances. Assuming the firm operates within its relevant range, only the total variable costs of production would increase with increases in production. The total amount of fixed manufacturing overhead incurred would not be affected by the decision to increase production. c. The CFO’s plan is not ethical. The intent of the increase in production is to distort the reported profit earned by the firm. By reporting a higher profit, the CFO would likely personally benefit through bonus compensation and, perhaps, stock options. d. The   effects   of   the   CFO’s   plan   should   be detectible   by   analyzing   the   financial   statements.   The   effects   to   identify   are described in the answer to (b). Of all the effects of the plan, the rise in inventory levels is likely the most prominent flag. 51. a.

        Tomm’s T’s       Income Statement (Variable)  For the Year Ended December 31, 2013 Sales (40,000  $22)

$ 880,000

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Variable cost of goods sold (40,000  $8.25) Contribution margin Fixed costs: Production Selling & administrative Income before taxes

  (330,000)       $ 550,000 $120,000   130,000 

   (250,000)  $ 300,000

b.

     Tomm’s T’s          Income Statement (Absorption)          For the Year Ended December 31, 2013     $ 880,000 Sales (40,000  $22)   $410,000 Cost of goods sold (40,000  $10.25) Underapplied fixed overhead*       24,000       (434,000) Gross margin     $ 446,000 Less selling and administrative costs         (130,000)  Income before taxes     $ 316,000 Number of units in ending FG inventory = 4,000 + 48,000 – 40,000 = 12,000 FOH: $120,000 ÷ 60,000 = $2.00 per unit Underapplied FOH = $2.00  (60,000 – 48,000) = $2.00  12,000 = $24,000 c. Inventory   increased   from 4,000   to   12,000   units   or   by   8,000   units.   Each   added   unit   absorbs   $2.00   in allocated fixed overhead or a total of $16,000. The presumption in the problem is that the books are maintained on a variable costing basis. Assuming only the current year needs to be adjusted (the beginning inventory of 2013 was charged with the appropriate fixed overhead), then the entry would be: Inventory (8,000 × $2.00) Cost of Goods Sold (40,000 × $2.00) Underapplied Overhead       Fixed Factory Overhead    

16,000 80,000 24,000 120,000

d. Advantages: The fixed costs are reported at incurred values (and not applied), thus  increasing the likelihood of better control of those costs. Profits are directly influenced by changes in sales volume (and not  influenced by building inventory). The impact of fixed costs on profits is emphasized. Product line, territory, etc., marginal contribution is emphasized and more  readily ascertainable.

Disadvantages:  Total costs may be overlooked when considering problems.  Distinction between fixed and variable cost is arbitrary for many costs.  Emphasis on variable cost may cause managers to ignore fixed costs. 

e. Advantages: Statements would readily reflect the direct impact of sales volume on profits.

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 

73

The consequences of fixed costs would be more obvious. Inventory swings would not influence profits.

Disadvantages:  Costs are not matched with revenues.  The difficulty in separating fixed and variable costs might cause statements  to be misleading.

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 

52. a.

Statements would confuse investors used to absorption costing statements. Confidential information (on the nature of costs) could be disclosed to  competitors. (CMA adapted) x

y $    8,000 9,200 12,000 14,200 18,500 28,000 34,000 30,000          24,000      $177,900

10 14 22 28 40 62 100 90   80      446

        xy  $       80,000 128,800 264,000 397,600 740,000 1,736,000 3,400,000 2,700,000       1,920,000  $11,366,400

        x  2 100 196 484 784 1,600 3,844 10,000  8,100      6,400 31,508

x=446 ÷ 9=49.56 y=$ 177,900 ÷ 9=$ 19,766.67 ∑ xy −n(x )( y) = $ 11,366,400−9(49.56)( $ 19,766.67) = $ 2,549,675 =$ 271.18 b= 31,508−9( 49.56)( 49.56) 9,402.26 ∑ x 2−n(x)2 a= y−b x=$ 19,766.67−$ 271.18(49.56)=$ 6,327 y ¿ $6,327 + $271.18 (# of charters) x

y

xy

 x 2

$  12,000 18,000 26,000 36,000 60,000 82,000 120,000 100,000     96,000 $550,000

$   8,000 9,200 12,000 14,200 18,500 28,000 34,000 30,000     24,000 $177,900

$      96,000,000 165,600,000 312,000,000 511,200,000 1,110,000,000 2,296,000,000 4,080,000,000 3,000,000,000    2,304,000,000 $13,874,800,000

144,000,000 324,000,000 676,000,000 1,296,000,000 3,600,000,000 6,724,000,000 14,400,000,000 10,000,000,000   9,216,000,000 46,380,000,000

x=$ 550,000÷ 9=$ 61,111.11 y=$ 177,900 ÷ 9=$ 19,766.67 ∑ xy −n ( x )( y ) = $ 13,874,800,000−9 ( 61,111.11 )( $ 19,766.67 ) b= 46,380,000,000−9 ( 61,111.11 ) ( 61,111.11 ) ∑ x 2−n ( x )2 $ 3,003,131,697.67 ¿ =$ 0.235 12,768,890,111.11 a= y−b x=$ 19,766.67−$ 0.235(61,111.11)=$ 5,405.56 y  ¿ $5,405.56 + $0.235 (gross receipts)

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